Gold 'flash crash' sparks a whodunnit?

Gold sold off sharply yesterday after a massive 24 tonne sell order pushed the price down 2.25% sparking rumours of a ‘fat finger’ trade.

Although the precious metal recovered some of its losses to close down just over 1.5% on the day, its largest one-day fall in nearly a month, the sheer number of contracts exchanged – some 7,800 in that single order- sent the rumour mill into overdrive.

‘If the selling was year-end profit-taking then it was inept,’ said Ross Norman, chief executive of bullion brokers Sharps Pixley. ‘Dealers try and finesse big sell orders into the market to get the best (highest) price for the biggest volume they can and thereby optimize profit - that requires stealth.

‘If on the other hand it was a "fat finger" episode as has been suggested with a broker said to be looking to roll his December gold futures contract then it was even more inept.’

Norman said it was more likely to have been a short play or algorithm-based trading as the sharp move down flies in the face of the current fundamentals with concern growing about the lack of agreement between the Democrats and the Republicans on balancing tax rises and spending cuts to address the fiscal cliff.

‘The US reaches its law-enshrined debt ceiling of $16.4 trillion early to mid-February 2012,’ Norman said. ‘That promises fireworks again as it did in August 2011 when gold hit an all-time high of $1,922 as the market stares into the abyss of a possible US debt default.’
‘Against the current economic backdrop, a short seller would have to be quite brave. In short, we will not know the identity or the reason for the sale for a while. Longer term gold investors should not however be deterred - the rationale for buying gold is as favourable as ever and a degree of patience required.’
The precious metal has recovered some of yesterday’s in early morning trading, up 0.23% at $1,720.30 per troy ounce.

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